Lawyer Aims To Leap `Hurdles' Of New Stockholder Law

January 7, 1996|The Wall Street Journal

In the past, the announcement by Silicon Graphics last week that it won't meet projected quarterly earnings - and the resulting 17 percent drop in its stock - would have sent William Lerach running to the federal court-house.

Lerach, a San Diego-based lawyer, is the nation's leading filer of class-action shareholder lawsuits, and Silicon Graphics is a classic Lerach target. Not only did the computer maker fall short of projections, its chairman and at least nine other company officials sold blocks of their stock in the preceding quarter.

But this time, Lerach isn't racing anywhere. Congress' new legislation, passed on Dec. 22 over a presidential veto, limits stockholders' ability to sue their companies for inaccurate stock predictions.

Lerach says he has been approached by "enraged stockholders," and he has plenty to say about the recent stock sales by Silicon Graphics Chairman Edward McCracken and the others: "I guess they're just lucky on their market timing," he said after the company's stock price fell Tuesday.

But will he sue? "There's no question the new law poses additional hurdles and creates new obstacles, even for legitimate, meritorious claims," Lerach said. "Frankly, it's going to take a lot of evaluation and work to tell whether victimized stockholders can sue."

Besides tougher legal standards, there are several procedural reasons to go slow under the new law, legal experts say. For one thing, the first lawyer to the courthouse in a shareholders' class-action suit doesn't automatically become the lawsuit's lead attorney, says Harvey Goldschmid, a securities law specialist at Columbia University. "That kind of nonsense is now ended and that's healthy," he says.

The pecking order for plaintiffs' attorneys in shareholder class-action suits now depends on who represents the largest aggrieved shareholder, not just the first. "You're going to see lawyers working out relationships with large institutional holders," Goldschmid predicts.

In addition, the new law slows down the ability of plaintiffs' attorneys to tie up their targets in the expensive and time-consuming discovery process. In the past, many companies have elected to settle rather than to endure such a siege. The law requires courts to hold up most discovery proceedings until companies can file a motion to dismiss a suit.

Under previous rules, Silicon Graphics' legal foes would surely have used the disclosure that McCracken and nine other company executives sold stock recently as grounds for a suit.

McCracken sold 60,000 shares in late November. Senior Vice President Robert Burgess, who sold his company, Alias Research, to Silicon Graphics last February, unloaded his entire stake of about 151,000 shares, valued at some $5 million, in the same month.

A company spokeswoman said that McCracken, Burgess and the other sellers complied with Securities and Exchange Commission rules in the sales, and that, with the exception of Burgess, the trading pattern wasn't unusual for company officials.

The new law makes it tougher to challenge trading by insiders. "Before, the theory was that if insiders were dumping stock, they automatically had an evil motive," says Alan Bromberg, professor of securities law at Southern Methodist University. Under the revised law, Bromberg said, "you'll need a much tougher factual basis for showing intent."

Similarly, the revised law shelters companies that make optimistic earnings projections if they are accompanied by disclosure of factors that might alter the results. "This is designed to put people like Lerach out of business," Bromberg said.

Lerach agrees his work has been made more difficult. But he declines to say whether he will sue Silicon Graphics or whether the new law will put a dent in his firm's booming business. "Congress wanted to limit or control meritless or abusive cases," he said. "Since we've never done that, the law would not apply to our cases."